ServiceNow, Inc. (NOW) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Jessie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the ServiceNow Q1 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Michael Scarpelli, Chief Financial Officer you may begin your conference.

Good afternoon. Thank you for joining us. On the call with me today is John Donahoe, our Chief Executive Officer. During today’s call, we will review our first quarter financial results and discuss our financial guidance for the second quarter and full-year 2019. We’d like to point out that the company reports non-GAAP results in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. All financial figures we will discuss today are non-GAAP, except from revenues and revenue growth. To see the reconciliation between these non-GAAP and GAAP results, please refer to our press release filed earlier today, and for prior quarters, previously filed press releases, all of which are posted at investors.servicenow.com. We may make forward-looking statements on this conference call, such as those using the words may, will, expects, believes, or similar phrases to convey that information is not historical fact. These statements are subject to risks, uncertainties, and assumptions. Please refer to the press release and risk factors and documents filed with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such forward-looking statements. I would now like to turn the call over to John.

Thanks Mike. Good afternoon, everyone and thank you for joining us on today's call. We delivered another strong quarter continuing the momentum from our outstanding 2018 performance. We are focused on driving customer success and we're expanding our footprint across almost 75% of the Fortune 500, enabling digital transformation as a strategic partner to the world's largest enterprises, and we're delivering digital workflows that create great experiences and unlock productivity. This is the future of work. Let's look at key Q1 results. In the first quarter, we closed 25 deals with ACV greater than $1 million. We now had 717 customers doing more than $1 million in business with us, which represents a 33% increase year-over-year. Our renewal rate for the quarter continued to be strong at 98%. This quarter, we saw a particular strength in the Americas region led by strong performance with U.S. federal agencies. Three of our top 10 largest net new ACV deals were with federal agencies, and we now had six federal customers doing more than $10 million in ACV with us. These results show how the public sector is embracing cloud-based solutions and it demonstrates our role as one of the core strategic partners to these government agencies helping them digitally transform how they operate serving their employees and citizens and delivering services. And our Q1 results also underscore our strong product portfolio. This quarter, our Customer Service Management product saw a significant growth with 28 customers now spending more than $1 million. Our customer workflow products enhance customer operations management. That means that our customers are able to deliver better experiences and outcomes for their customers. In fact, Customer Service Management led to one of our largest deals during the quarter. This customer evaluated a number of competitors including the legacy incumbent technology provider and they chose ServiceNow because of our operations management capabilities. This is our sweet spot, managing inbound contacts to identify the root causes of customer issues, fixing those issues so that you can prevent future problems, and automating self-help solutions. And in other areas, our IT and HR products led a large expansion deal with Humana, a Fortune 100 company. Humana is now expanding their use of the ServiceNow platform across IT and HR to enable enterprise-wide focus on improving productivity and enhancing their employee experience. Across our customer base, we saw positive response to the launch of our Madrid platform release in Q1. Early indications show that customers are adopting Madrid faster than previous releases. Madrid offers customers over 600 innovations such as new mobile-first experiences and digital workflows that unlock productivity for IT, for employees, and for customers. This customer response shows our progress in making upgrades simple and easy, ensuring customers can quickly take advantage of our latest platform and product innovations. And I'm personally very excited about the mobile capabilities we're rolling out. We're delivering easy, intuitive, out-of-the-box mobile capabilities that enable consumer-like experiences across the enterprise. These are the kind of experiences that employees expect and demand today. We’ve also made significant strides in our product organization over the past year led by Chief Product Officer, CJ Desai. We have a great global product team and they're driving continuous quality enhancements and customer-focused innovation across our platform and product portfolio. This team is also focused on building a strong pipeline of product innovation as we look to meet a broader range of customer needs and leverage the power of our Now Platform across the entire enterprise. During the first quarter, I had an opportunity to visit Israel and spend time with our product teams there. As you recall, we acquired SkyGiraffe in late 2017 to enhance our mobile capabilities, and that Israeli-based team is fully integrated now. I met with this team and many other tech entrepreneurs throughout Israel. Israel has an incredible community of outstanding world-class technology talents and we're building a strong product and tech hub there with more than 125 employees to-date. I left Israel so impressed with the quality and caliber of our team and with the innovation happening there. I also traveled during the quarter to Amsterdam, Tokyo, and Sydney spending time with our teams and customers. My customer interactions worldwide continue to validate the business imperative of digital transformation. Customers continually tell me that the strength of our product portfolio and the capabilities of our Now Platform position us as one of their core strategic partners enabling digital transformation. Our focus on the Now Platform and three core workflows, IT, employee, and customer are being well received by our customers, and it's empowering our product teams to focus on delivering even more integrated digital workflow solutions that drive great experiences and unlock productivity across the enterprise. A few weeks ago, we held our first CIO Advisory Board meeting, spending two days with roughly a dozen of the top CIOs in the world. We had a rich discussion, reaffirming that we are on the right path with our strategies, our product vision, and our focus on customer success. We've also been pleased with some of the positive feedback we've received throughout the quarter in response to our first-ever company brand campaign, which launched in January and continued through early June. As I've said before, this campaign is designed to increase awareness of ServiceNow more broadly with C-Suite executives. The campaign is also resonating very well with our employees and enhancing our recruiting efforts from a talent brand perspective. We will continue to invest in company brand awareness to position ServiceNow as both a partner and employer of choice. In closing, I'm pleased with our strong start to 2019 and our continued progress against our priorities. We are committed to making the world of work, work better for people and we're focused on building key trust-based customer relationships to enable their digital transformation and create the future work. Now I know many of you are planning to join us in Las Vegas, on the week of May 6, for our financial Analyst Day and for Knowledge 2019 our seminal customer event. We expect this year's conference to be our largest-ever with 20,000 people registered to attend. Spending time with our customers is always my favorite activity and knowledge is one of the real highlights of the year. I'll look forward to seeing many of you there. With that, I'll turn the call back over to Mike.

Thank you, John. In Q1, we delivered another good quarter strong top line growth combined with margin expansion. After a strong 2018, it was very important that we start 2019 off on the right foot, let's dive into the highlight from the quarter. Subscription revenues for the first quarter were $740 million, representing 40% year-over-year adjusted growth including $20 million of foreign exchange headwinds. Subscription billings were $810 million representing 33% year-over-year adjusted growth including $22 million and $18 million of foreign exchange and duration headwind respectively. Our revenue and billings performance was driven by strong bookings in the Americas. In addition, accelerated revenue recognition from self-posted deals related to our Federal business, drove the revenue outperformance. We continued to see traction across the product portfolio with 17 of our top 20 deals purchasing through more products as customers realize the power of the platform in an enterprise-wide solution. We booked four Customer Service Management deals with more than $1 million of ACV including, a $3 million deal to a federal agency, our largest CSM deal ever. We also booked a $1 million HR Service Delivery deal with the federal agency to modernize our HR processes and employee experiences with our user forum and mobile capabilities being a differentiator. Our U.S. federal business highlighted the quarter representing 15% of total net new ACV, up from 6% the prior year. We booked our largest Q1 deal ever with the federal agency who is now doing more than $18 million in ACV. We expect the U.S. federal sector will continue to purchase throughout the year as they accelerating their use of modern technology to digitally transform how they operate. We saw a strong profitability in Q1 with operating margin at 19%, driven by our revenue performance in expenses that will be realized in Q2. Our free cash flow margin was 40% and benefits from a seasonally high amount of collections from our strong Q4 billings. Now, let's turn to guidance for the second quarter and full year 2019. For Q2, we expect subscription revenues between $778 million and $783 million representing 35% to 36% year-over-year adjusted growth including approximately $15 million of foreign exchange headwinds. We expect subscription billings between $798 million and $803 million representing 32% to 33% year-over-year adjusted growth including approximately $17 million of foreign exchange headwinds. We expect a 17% operating margin which is impacted by Q1 expenses moving to Q2 expenses related to our annual users conference Knowledge 2019. We expect 193 million diluted weighted average shares outstanding. Coming off our strong Q1, we are raising our full year 2019 subscription revenue guidance to between $3.235 billion and $3.250 billion representing 35% to 36% year-over-year adjusted growth including approximately $45 million of foreign exchange headwind. We are also raising our full year 2019 subscription billings guidance to between $3.725 billion and $3.740 billion representing 32% year-over-year adjusted growth including approximately $50 million and $22 million of foreign exchange and duration headwinds respectively. While we are increasing our topline revenue guidance, we are also increasing our investments and maintaining full year 2019 margin guidance as follows; subscription gross margin of 86%; operating margin of 21%, which includes record hiring in Q1; and free cash flow margin of 28%, which includes the opening of a new pair of data center in Japan expected for later this year. For the year, we expect diluted average weighted shares outstanding of 193 million. Before closing, please note our financial Analyst Day will be held on Monday, May 6th in Las Vegas in conjunction with Knowledge 2019. For those who cannot join in person, we will hold a webcast to the event accessible at our IR website. With that operator, you can now open up the lines for questions.

Thank you. [Operator Instructions] Your first question comes from Raimo Lenschow with Barclays. Your line is open.

Hey, thanks for taking my question. Two quick questions. First, can you talk a little bit about the platform strengths this quarter? Obviously, you mentioned federal, but the 17% you got from platform still kind of seems to be like a step-up from what we've seen before.

Yes. Well, included in that group, platform was strong, but you also have Performance Analytics in there, Raimo, as well and Performance Analytics had a very strong quarter, but platform was strong as well and we're seeing that in many of our customers.

Okay. And then can you talk a little bit about -- you talked about the record hiring in Q2, Mike, but you still talked about Q1 expenses kind of that slipped in Q2. Can you talk a little bit about what was going on there and the magnitude? Thank you.

So there was record hiring in Q1, and the impact of that is flowing through Q2. It was very back-end loaded, a lot of that hiring that skews as well. There were some other expenses that we are expecting to incur in Q1 that got pushed into Q2 because of timing, and we weren't ready to spend the money efficiently, so we pushed into Q2.

Perfect. Well done. Congratulations.

Your next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Excellent. Thanks so much, and congrats on a great start to the year. My first question is for John. John the momentum you're seeing in U.S. federal is really impressive and Mike's comments suggest you're seeing a lot more demand in this market throughout the year. Can you help us understand the size of opportunity in context of 15% of your ACV mix today and where can it go? And how do you think about this translating to other governments around the world, looking to transform the citizen engagement in the way government employees work?

Well, Brad, I think the way you put the question is exactly the right way to think about it. Because as I just step back, let me describe this as the public sector, and included in the public sector will be federal, state, regional, and local governments. And in the first quarter, I think in my global travel, I met with all flavors of that. Simply put, those institutions are under more pressure than ever to deliver better experiences for their employees and their citizens and to drive real productivity in a time of economic challenge. And the key thing is that they are now realizing that cloud is a great way to do this. And by and large, they’ve largely overcome their security concerns around the cloud. So whether it's the U.S. federal government, other federal government, state, regional, or local, we see a pretty aggressive appetite to both understand and embrace cloud. And so as you know let me just now zoom in on the U.S. federal a little bit. We, over the last several years, have built a dedicated U.S. federal team. So we've been focused on both orienting and packaging and ensuring that our platform and our products conform to the requirements of the U.S. federal agencies. Then in 2018, that was roughly 10% of our ACV, and as Mike mentioned in Q1 this year it was roughly 15%. And over time, it's hard to gauge any given piece. But I think Mike and I, we both say that overall public sector when you add not just the U.S. federal government but other federal government, state, and local could be up to 20% of our business over time.

I would agree. There’s no reason why it can't be 20% for us from what we're seeing right now.

And one of the interesting things Brad, that is, to me one of the most exciting pieces of this is that interestingly these government public sector organizations are often some of the most innovative users of our platform. And what’s interesting is these federal agencies and many of the state and regional in Australia, U.K. and other markets, think platform first and they see the power of our platform to adopt their ability to deliver better experiences. Let me give you an example. The Veterans Affairs, U. S. agency is adopting a ServiceNow-first philosophy both for their employees and for their customers who are veterans. And so for instance, they've got a global service desk for over 550,000 Veterans Affairs employees, powered by ServiceNow and they're using ServiceNow to allow their customers, that is the veterans, to help schedule some of their procedures in their respective hospitals. So because our assets are in the Veterans Affairs CMDB, if a veteran has to schedule an MRI, ServiceNow’s platform can help that Veteran figure out which hospitals have which openings with which equipment and actually schedule their appointment. So I find it very energizing to spend time with whether its defense oriented, federal agencies or other federal agencies because they are some of the most creative and innovative users of our platform.

Thanks very much for that color. And Mike, just a competitive question for you, but more in the context of pricing especially in HR and customer service clouds where you're seeing large players stepping up investments, can you talk a bit about pricing trends and average discount specifically in those clouds? Thank you.

Yeah. We haven't seen anything noticeable from a -- if you're talking specifically about HR as we like to say our employee experience. And we really take a different approach to those other vendors. Those other vendors are more specific around HR more and more around enterprise service delivery for our employees, and we're still seeing adoption by our customers jointly with whether it's a Workday or SuccessFactor or even extend the life of the Peoplesoft implementation. So, no change there.

Excellent. Thanks again.

Your next question comes from Kirk Materne with Evercore ISI. Your line is open.

Thanks very much. And thanks for taking the question. I guess, John, just to start-off with, given the success you'll had in the federal government in related to someone unique how are you thinking just about the broader virtualization of your sales organization as you go deeper into big enterprises sort of being able to speak the language of industry and be able to serve help them solve their biggest problems? I guess, how are you thinking about that evolving as you look out maybe over the next 12 to 24 months?

Kirk, it's an area that we're leading into. And as you've mentioned, federal was sort of the first area where we really focused on it and that is both a go-to-market motion where you have dedicated people who speak the language, but also tailoring the product to making sure we're meeting the federal security and other requirements. Second area, I think you know as we have a dedicated we call meds life team, but a dedicated team around some of the health care market. Again both to meet the go-to-market expectations of those customers that we understand their deep needs and to ensure that our product complies with the regulatory compliance requirements and the healthcare sector broadly defined, and obviously there are several subsectors within health care. The third area where we have a I would call a quasi formal vertical financial services. Now, this is just by virtue the large portion of the financial services world is either in New York or London. And so if you were to look at our New York and London teams, you see a lot of dedicated resources toward the financial services sector obviously within that you've got banking, you've got insurance you have other sub sectors. And their response to go-to-market motion also some focus on the encryption and other security requirements required for compliance and regulatory capabilities. And then, so those three, I would say were furthers to long and we're increasing to invest in those and making sure that they're becoming more globally oriented in our ability to share experience and our ability to ensure that we are tying our road maps to them. And then we have a set of next verticals to telecom that's an area where again the needs are very common globally whether you're Telstra in Australia or AT&T or Verizon in the U.S. or Softbank in Japan. And so that's an area where I would say is next on our stage to building out a global -- a bit of a global vertical focus.

Great. Thanks very much.

Sure. I'll just finish up, Kirk, there are couple of others -- variety of others that where it's more packaging and communicating that we understand industry, we speak their language, we can share best practice and those would be further down the road.

Thanks very much. I'll pass it on to others. Congrats on the quarter.

Your next question comes from Sarah Hindlian with Macquarie. Your line is open.

All right, great. Thank you so much and thank you for taking my questions and congrats. I'll add my congratulations on really nice start to the year. My first is for you John. John, as you're looking at digital workflows, how are you thinking about the next near adjacencies for you guys? And maybe you could give as an update on how you're thinking about your M&A strategy as well as this time? And then Mike I have a follow-up for you. It would be great if you could give us a little bit of incremental color on what you're seeing in terms of new logo addition, I think in particular, in international market? Thanks guys.

Sarah on the first part of your question in terms of organic product innovation, I think we talked before that we, at the beginning of last year, formed something we call NowX, which is a dedicated team focused on defining and building products that will launch one to three years out. And what's interesting is we have an abundance of ideas. So , -- and as ideas that come from our customers, ideas that come from developers, ideas that come from our people. And frankly, many of these ideas come from examples where customers have built a automated workflow on our platform and they come to us and said, hey, we just did this -- we built this for our own use, but we would love it if you build it out-of-the-box. And so what the NowX team, which is now up to well over 100 people do is they take all of these ideas on top of the funnel, they prioritize, work their way down to basically build-out working prototypes of let's say three to five, may be eight of them and then actually get some early, I'll call it, alpha customers to see if they really resonate and then get the beta customer to see if they come out and if they are have the kind of value we think they do and that our goal is that each knowledge to announce one to two -- I don't know if you call them new products. I'd called them extensions -- adjacent extensions of product portfolio and you will hear about one of those this coming Knowledge. And so I think you'll see a series of incremental new capabilities and new products that come out of us each year building that organic innovation muscle is really important. And then M&A, M&A to-date has largely been focused on what I would call aqua hires that's probably defined as acquiring technologies and teams that help build-out and accelerate the platform. We'll continue to do those. But if and when we see opportunities to acquire adjacent capabilities, acquire new growth engines, we'll -- obviously, we've got the resource to do it, we'll act on it. One of the luxuries we have is the luxury of choice and time, because we have such a strong organic innovation agenda.

And then, Sarah, on your question with regards to new logo acquisitions. What I'll remind you, is roughly 80% plus of our net new ACV comes from existing customers. So the new logos don't contribute a big piece of net new ACV in any point in quarter but that is the future for those upsells. With regard to new logos, we did add about 200 new logos in the quarter and that compares with all of 2018. We had about 1,000, I think. If you look at that, it was about 50% North America and 50% rest of the world. I will say North America was really driven by our federal as we said earlier; it was the one that really outperformed in our net new ACV. I would say EMEA and APJ were a little light, but that's because they came off such a fabulous 2018 and we knew Q1 going into that, when we gave guidance, is going to be a tiger quarter.

All right. That’s great color. Thank you so much. Appreciate it.

The next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Hey, guys. Thanks for taking my questions. Congrats from me as well. And I guess, for either of you ITSM was included I believe in 15 of the top 20 deals this quarter. And I think you talked last year about how ITSM reaccelerated. I guess, I'm wondering, did you see that same trend this quarter? And can you put a finer point on maybe what's driving such strong results in your core?

I would say, the ITSM, there was no reacceleration in ITSM in Q1. But ITSM was -- ITSM and IT products in general were extremely strong for us and continue to be the big driver of our net new ACV and we expect that to continue throughout the year, especially when we're landing new logos. But there's still a lot of room for expansion with our existing customers, within ITSM.

Just building on that Matt, what Mike was saying that, here's what I think can be a little misleading. And I think frankly us as -- we as an organization really brings us aggressively last year and may be late 2017, but throughout last year. We may have an ITSM presence in a large global bank, but it maybe in the private wealth business and not yet enterprise-wide. Or it may be in Europe, but not in the other regions. And so, when we look at, we have a strong ITSM presence in, as I said earlier, 75 of the Fortune 500 are our customers. But in many of those cases we landed in a division, or a geography, or a certain part of the organization. And we're in a world where increasingly customers want to drive platform adoption across the enterprise. And so, some reasonable portion of the ITSM growth for the 'reacceleration' is simply existing customers saying, you know what, we've got great results in division A, let's drive this enterprise-wide. We got great results in geography A, let's extend that to be a more global rollout. And so, that's why I don't think it's -- you can consider it a 'mature product'. I think that's a significant opportunity for me.

That's great. Maybe just one more quick one about GSI momentum. I know we've talked about it in the past in terms of how significant GSIs can become for you guys. I'm wondering if there's any update there. And perhaps, was that some of the strengths in platform sales this quarter?

What's interesting, I was with Mike Lawrie from DXC yesterday. We had our quarterly top-to-top. I was with Janet, the Chairman of Deloitte last month, we have a half day top-to-top policy and Wilson from Accenture next week at Financial Analyst Day. And I think he'll even be a guest of honor there. And in each of these conversations then after KPMG IBM are -- some of are -- basically what they're saying is they see the same digital transformation opportunity need. They see ServiceNow as one of the fastest growing portions of their practice. And I think we've gotten significantly better over the past 12 to 18 months of basically calling on selling to and serving customers in a coordinated way with these GSIs. And that’s actually healthy for customers, because in many cases to get full value out of the ServiceNow Platform, you need to reengineer your processes. It's one thing to lift in shift, historical processes and put it on the ServiceNow Platform, and you get some benefits of that, but the real power is when you take the time to also reengineer how you operate. That's how you get digital transformation to operate. And so our platform is increasingly at the epicenter of that, not just in IT but across many of the various products and services. And some of these GSIs, I'm talking with my -- yesterday they have platform GFC, right? They are building their own platform, of which ServiceNow is a core component along with some of the cloud providers and others. And so we sell both with the GSI directly to the customers where there's a direct ServiceNow instance. And in other situations, the customer is buying the platform if you will from the side of, which ServiceNow is a piece of it. Frankly we're indifferent; whatever allows the customer to get the best results. So they're a critical part, not just of our future but I think frankly a critical determinant about whether digital transformation actually transforms customers businesses and drive significant improvement and results. It's got to require us working closely with the GSIs. And I think they see that, we see that. And so they're stronger, focusing energy than ever on making sure that happens. I'm also delighted, I forgot if I mentioned this last quarter, we hired David Parsons to run our partner ecosystem. He's just a fabulous leader in this area. And so I'm really pleased with the progress that our teams are making in this area.

Well done. Thanks again guys.

Your next question comes from Walter Pritchard with Citi. Your line is open.

Hi, thanks. Question for John and question for Mike. John, on the CSM side you mentioned legacy incumbent replacement. Could you talk through the competitive landscape there, what you're seeing given the success this quarter? How much is the big sales force in the market versus legacy and then some of the small emerging players in that space?

Yeah. So most of the CSM deals that we're doing is we're not replacing modern technology, we're replacing legacy technology. And that could be a legacy Oracle implementation from the placebo implementation, may be there is a lot of remedy that was used out there as well for CSM or their own solution. And that's typically what we're seeing. There usually is modern technology competing at the table for the same business we're going after. It's really about our approach to CSM, why customers choose us, when they do choose us is because they like the fact that we are all about understanding root cause analysis within our system, lot more collaborative with people in the organization to resolve the problem, so you never see that it's doing. And that’s just a very different approach to Customer Service Management from a CRM-centric approach.

Walter, let me just build on that. CSM is clearly a huge segment, a huge market, $20 billion market. And I think way too many people think that somehow it's all the same and it's not. There are distinct segments in that market. And different providers align better with different segments. So as Mike said, we're not focused on going after the full $20 billion. There are certain segments of the CRM -- I'm sorry, the customer service market that require strong CRM-based system. We're not the best provider of that. Salesforce is the best provider of that. But there other segments that want to take inbound contacts, identify root cause, which is a cross-functional workflow, fix what the problem was, which again requires cross-functional coordination workflow, so that that problem doesn't happen in the future. And segments where you want the customer to do -- be able to address in a self-help or automated fashion, resolving their problem, understanding where it stands. And our platform is well geared for that segment of the market. And so, if you were to see where we focus on our go-to-market teams in CSM, it's not across the enter CSM market, it's against the sub-segment of the market where our product lines development leads, that tends to be B2B, technology company, services businesses and ones where there is, I would call, sophisticated customer needs to be served. And so, I think, this is not a zero-sum market, it's a $20 billion market. And as Mike said, there's a lot of old legacy software there. And so, I think, there will be multiple winners in this segment.

And then, Mike, on the upfront business, you had a strong quarter there with the Fed. How should we think about what you're expecting as we move throughout the year? It seems like that was light in Q4, and then it was stronger this quarter. Any way for us to get an expectation there for the year, thinking about how it will vary quarter-to-quarter?

Unfortunately, it depends upon the new business that's happening. Renewal business, we know, for instance, I know in Q2 there's a pretty big renewal that will take place that's on-prem. We did suspect that this business was going to happen in the quarter, but we kind of hedged that a little bit, because I just don't know if it doesn't come in. It was really driven by the federal government, a chapter of our federal government, roughly 50% of our federal business is self-help, because they can't be in a public data center and that would consider ours to be a public data center, even our fed ramp data center they're not comfortable being in, because of the security they require. And so it's hard to forecast. I will say it is about 7%, 6% to 7% of our revenue for the full year is associated with self-hosted deals.

Great. Thanks.

Your next question comes from Jennifer Lowe with UBS. Your line is open.

Hi. Thanks. This is Rakesh Kumar sitting in for Jen Lowe. I wanted to talk about this Adobe partnership that you discussed a couple of weeks ago. What does this specifically mean for ServiceNow? And what more can we expect in the future?

Well, Rakesh, this frankly came to Shantanu and my attention, based on our respective customer visits. It wasn't something -- even though he's a very good friend of mine, it wasn't something we thought of in isolation. We both came back from ongoing customer business we do and had a growing number of customers asking, hey, could you connect some of the ServiceNow Platform with some of the Adobe capabilities we had and Shantanu was hearing the same. And we're a big Adobe user yourself internally. So, we got our platform team and to a lesser extent our CSM team together with the Adobe team about how can we ensure that a shared customer that's using Adobe and ServiceNow, we make one plus one equals three, making it easier to use, getting more value and it's often about linking the data. It's -- Adobe provides tremendous marketing analytics and other data, our platform has a lot of data and if you're going to give a 360 view to the customer, you're going to get the kind of the actionability. Adobe generates the insights, we often are the system of action. And so linking them together is -- wherever possible making it making easier for customers to get value, sort of, with the spirit. And so Shantanu announced at their customer conference -- feedback from our customers has been strong and our teams are excited about it. We think it also can offer some incremental opportunity for each company.

Great. And then I have one more. You talked about adding two new data centers in Japan. Does that potentially accelerate G2K penetration in that region?

Well, the whole reason we're building those data centers because we think it's going to drive business and there are a lot of G2Ks in Japan specifically. And based upon our feedback to get into some of those larger entities, they require data centers to be in Japan because of the data sovereignty requirements. So yes.

Thank you.

Your next question comes from Keith Weiss with Morgan Stanley. Your line is now open.

Thank you. This is Sanjit Singh for Keith Weiss and congrats on a nice start to the year. I have two questions and maybe we can start-off with a question on Madrid. John you mentioned the about 600 new features with this release. And I think he highlight was sort of the mobile application making it easier to build application on top of the platform. Do you see any of these new features or capabilities sort of force multipliers for some of your core products? Or does that sort fuel will growth in just the overall platform business?

Well, I'm very excited about mobile, right? In my prior life, I had a chance to have a front row seat in the consumer mobile revolution and got to see first-hand how borne on the cloud application like an eBay, like a PayPal, like Amazon, a Lyft have completely transformed our lives at home by taking what complex and personalized and making it simple, easy, and intuitive. That's now going to happen in the enterprise. And with Madrid, was the first time we've launched in essence the re-platform SkyGiraffe, native mobile capabilities in the ServiceNow Platform. And Madrid started with the fulfiller experience. And so I see some nice pick-up by our customers who are excited about that. New York which comes this summer has the employee experience. And so you'll hear us talking at Knowledge about how the mobile employee onboarding capability that's true enterprise-wide onboarding that we're using it internally now at ServiceNow and it's awesome. And then secondly, what I would call, shared services portal back in the mobile lab. I think you're seeing the most progressive companies realizing that employees don't care if they have an IT problem and HR problem, a facilities problem, a legal problem, finance problem they just want if their problem addressed, they just want if their questions answered. And so if you're going to get people to migrate from change their behavior from picking up the phone and calling to go in one place to get their questions answered and their problems addressed that must be a shared services portal internally branded, right? So we see that. We have that as a web product today. In New York, there will be I think just killer mobile app that will be out-of-the-box, low code, no code requirement for the customer, branded in the customers name where they can then allow their employees to go one place to get their issues resolved. And so well that lead to acceleration, you called an acceleration of ITSM and HR case management some of the other product side. I think it will be and certainly been enhancer and we hope an accelerator and it is. You see more and more company taking a shared services mindset to driving to create an employee experience and I think mobile -- I think mobile be an accelerator of that.

That makes a ton of sense. Looking forward to hearing more at the Analyst Day in a couple of weeks. My second question was sort of our around sales and with so many big opportunities ahead of the company whether it's ITOM or CSM or HR from a sales perspective were there any changes made this year to -- moving to a more specialized sales force? Or do you really feel that the current sales force can go -- can go to a customer's who are selling it -- selling the entire platform whatever use case the customer maybe interest in?

Well, I think the biggest change is, I don't know, if you classically call it sales, but it's the other parts of the full go-to-market motion, which includes post-sales coverage. So I mentioned in my remarks that, we had -- we met with 10 to 15 of the top CIOs in the world in our CEO Advisory Council. And one of the things our best and largest customers are looking for is dedicated ServiceNow resources, who are solutions architects, who are onsite helping them ensure that they are architecting their implementation of ServiceNow to get maximum value from the platform and advising them how to extend the platform. And so as we think about, if we think about our entire go-to-market motion, it's not just the classic pre sales discipline and accounting tech as the solutions consultants product line specialist, but we also now solutions architects who are also often part of our professional services organization, who are training in certification and our partner ecosystem I referred to earlier is that whole combination of capabilities that allows us to deliver that kind of end-to-end customer coverage that allows us to expand those customer relationships, the way Mike described earlier in a healthy manner. And in our case, we're quite fortunate that all of that reports to Dave Schneider. And so Dave is architecting right from the very beginning, a seamless experience where when we both sell to a customer initially, and then serve them and expand our relationship and help deliver real value to them over time, we're doing that bringing the full breadth of our capabilities to bear that full end-to-end we call it go-to-market experience and includes customer success, solutions architects and coordinating with our partners. And so in that sense, yes our sales motion is evolving and Dave’s doing a great job and the team as I mentioned Dave Parsons, Jimmy Fitzgerald, Cat Lang who are on the post-sales coverage areas, coordinating along with Kevin Haverty and really strong pre-sales team we have and is now increasingly -- we don’t need to talk about pre-sales, post-sales, we’re just talking about customer coverage.

Got it. I appreciate the thoughts. Thanks.

Your next question comes from Samad Samana with Jefferies. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I wanted to ask about traction for the add-on products outside of the U.S. or maybe if you could give us a little bit more color around whether you're seeing more traction for CSM and HR Service Delivery in the U.S. or outside of the U.S.? And within the New York products what's having more success with your international customers?

We're really not seeing any difference from a customer adoption of the emerging or platform. It's pretty much the same profile in the U.S., in EMEA and APJ. At the end of the day these tend to be global, large enterprises that all have the same problems. So, I'm not seeing any noticeable difference. Yes one quarter you may have because there's big deals in CSM or HR or may be stronger in one regional than other, when you look at it over a year there's really no difference that I've been able to see.

Great. And then maybe just one follow-up. The ITSM pro SKU, I believe that’s priced quite higher than the core SKU. I'm curious if that's having an impact on the size of new deals? And as existing customers come up for renewal, maybe you could comment on whether they're upgrading to the higher dollars if that's driving a positive impact on getting them to adopt additional products rather than eating up price increase? So, maybe it will be helpful if you could just walk us through that as well? Thanks.

Yeah. So I can say the pro bundle was really a way to monetize the investments we've made in artificial intelligence in machine learning. And we have definitely seen an uptick in that pricing has been able to keep our pricing higher on customers who are likely to do that with new customers, and w are seeing success on renewals with customers, but it's still very early. Remember our renewals take over a number of years, typically a customer signed three-year contract. And I think it's going to take a little bit more time to see what the uptick is with our installed base of customers, but it's definitely getting traction with new logos.

Great. Thanks for taking my questions today. Congrats on the quarter.

Your next question comes from Derrick Wood with Cowen. Your line is open.

Great, thanks. John, given the brand marketing you've invested in over the last few months. I know you mentioned its increased awareness with the C level executives. What I'm curious has this already helped in the field surface new conversations and engagement at the C-level? And I guess if we were to fast forward a year or two from now is one of the hopes that it drives more executives to be buyers of ServiceNow? Or how do you think it could help transform high level engagements?

Yes, Derrick. I think it's too early to point out that direct cause and effect. But I can tell you for instance as I engage with C-Suite execs either as customers or just more generally the number of people have said, hey I saw that ServiceNow ad, boy, that was funny, that was great which is exactly what the point was. Alan Marks who is sitting here next to me is our Chief Brand Creative Officer and was the real architect behind these commercials. And again here's the simple -- the way I think about it and I think Mike and I would think similarly about this. A year from now when a CIO or CIO and CHRO are bringing to our CFO a $10 million contract for ServiceNow, we want that CFO to say we offer to ServiceNow. And so there's just a general awareness as being one of the top strategic platforms that we're trying to build. Whether that lead to new leads across the C-Suite? I don't know. Frankly, that's not the direct goal because the new leads come from more direct selling activities. This provides kind of the air cover, legitimacy, and brand building that establishes us as a leading innovative, very human with maybe a little sense of humor company. I also think frankly the value as much with -- on the employee brand side. Talent is the lifeblood of any technology company and we are growing rapidly and growing globally rapidly. And so it matters if students on the top universities prefer to ServiceNow, it matters if someone in a local market can say go home to their parents -- the older proverbial mother I'm joining ServiceNow and have his or her mother have heard of ServiceNow. You may laugh about, but that kind of stuff matters as you're kind of scaling in the way we are and we are absolutely focusing and attracting and retaining top talent. And so the global brand building is also part of that, C-Suite executives and talent. So, good start. We're going to get the data in on aided, non-aided awareness which I'm sure has increased and we'll continue to invest to build that over time.

Got it. Thanks. I was hoping to touch on the SecOps product, it doesn't seem to get as much attention a CSM or HR. But can you talk about how you see the opportunity shaping up over the next 12 to 18 months? And maybe what you can do to help drive more penetration in the security budget?

Well, I mean I think interestingly one of the things that we've done is by bundling our products into the three workflows and SecOps in the IT workflow, I think that's a little bit more symptomatic or emblematic and aligned with how the decision-making often happens because where we thrive is when a CSO and a CIO are both jointly involved in the -- our products decision. We do vulnerability response, incident response and so as part of I think a healthy and natural ServiceNow bundle if you will, ServiceNow suite of solutions. I'll also say I mentioned earlier I was with Mike Lawrie, his team from DXC yesterday and they had some very interesting security offerings that they were saying that they believe ServiceNow can be a really important component to it. So, I think partnerships like -- with people like DXC, with people like Accenture, Deloitte, the KPMG can also accelerate that part of our business as we are offering the full security solution. We have an important component of it with our security -- our incident respond, our vulnerability response and to some extent our GRC capabilities.

All right. Okay. Thank you.

Your last question comes from Michael Turits with Raymond James. Your line is open.

Hey Mike and John. I just want to talk about the mid-market and commercial market. Who are you seeing competitively down there? And are you adjusting your go-to-market in any way?

We tend to see in a lower market that's where you hear more of the -- with their service desks that's going to send us, can you have Freshworks spend the same people that we've seen there for a number of years, but it's a very small piece of our business. As you know, we tend to focus more on enterprise the commercial segment now was around 20% of our business and even of that that's really the high-end commercial. It's typically the 3,000 to 5,000 employees we focus on. And it's still very much is a direct selling model. We are trying to do more through the channel that at the end of day when you have customer data they want to have a direct relationship with you. So channel partners are more involved in that segment, but we still have direct contracting relationships with those customers. And I've got to say there's really been no change in that market for the last five or six years that I've seen. But the one exception, I would say is we used to hear more of Cherwell. We don't hear of Cherwell nearly as much as we used to in that segment.

And Michael, just building on Mike said my observation would be one we have a terrific leader there John Sapone and he's got a really, really strong team, a talented commercial sales team. But what you see is that there are certain businesses that are in that we define commercial as 1,000 to 5,000 people that are high growth and are on their way to becoming an enterprise. And almost inevitably, the larger you get, the more you want a platform and the more you want to scale platform like ServiceNow and that's really where we're strongest. Someone is going to say, right 1,000 employees and be there three to five years now. They have to make a fundamental decision, do they want to go with one of the companies Mike mentioned earlier or do they want to go to ServiceNow. But where we really like about our position is those companies in that market are growing understand that they need to once you get to a certain size you have to have the kind of fundamental platform that we offer. And so John and his team do a nice job of segmenting that market ensuring they're focusing their energies on where customers have a real driven need for what we deliver and offer. As Mike said --

Thanks guys. Thank you. Oh sorry.

Okay.

Thanks very much guys. Really appreciate it.

Thank you, everyone. As a reminder, a replay of this call will be available as the webcast in the Investors section of our website. Thank you for joining us today.

This concludes today's conference call. You may now disconnect.